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The Supreme Court and Hemming

Supreme Court Main Entrance 03521C press office supplied  146x219The Supreme Court has overturned the Court of Appeal ruling in Hemming on licensing enforcement charges. David Matthias QC analyses the judgment.

On 29 April 2015 the Supreme Court delivered a unanimous decision in the important case of R (on the application of Hemming and Others) v Westminster City Council [2015] UKSC 25. In overturning the decision of the Court of Appeal which had upheld the decision of Keith J. at first instance, the Supreme Court acceded to Westminster's argument and restored common sense to the question of what licensing and other regulatory fees can lawfully include.

To most people at least, it is common sense that licence fees should comprise not only a sum to cover the administrative cost of issuing the licence, but also a sum representing the licensees' share of the cost to the licensing authority of regulating and enforcing the licensing scheme in question. After all, enforcement measures taken against unlicensed operators or licensed operators trading outside the terms of their licences, are of major commercial benefit to law abiding licensees. Competition they would otherwise face from rogue operators is minimised by effective enforcement.

Interestingly, it had previously fallen to Westminster to secure judicial approval for this commonsensical approach to the question of what licensing fees can lawfully comprise (see: R v Westminster City Council ex p. Hutton (1985) 83 LGR 516). A full 30 years later Westminster was obliged to return to the fray to secure the Supreme Court's affirmation of the principle that licensing fees may lawfully include amounts calculated to cover the cost to the licensing authority of regulation and enforcement.

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The present challenge to that principle was brought by one Timothy Martin Hemming, who owns and operates a sex shop in Soho and holds a sex establishment licence entitling him to do so, and six of his fellow sex shop operators from that part of Westminster. Their case was that the approach approved 30 years before in ex p. Hutton was no longer lawful due to the effect of the European Union Directive 2006/123/EC on Services in the Internal Market, which has been implemented into domestic law by The Provision of Services Regulations 2009. Specifically, it was asserted that Article 13(2) of the Directive, and Regulation 18(4) of the 2009 Regulations precluded Westminster from including costs of enforcement activities against unlicensed operators in determining the licence fees payable by licensed operators.

Despite setbacks both at first instance and in front of a powerful Court of Appeal (Dyson MR, Beatson and Black LJJ) Westminster determined to continue the fight and on 21 February 2014 was granted permission to appeal by the Supreme Court. The huge importance of the case, not only to all other licensing authorities but also to other regulatory bodies, finally struck home, so that by the time the case came before the Supreme Court on 13 January 2015 there were no fewer than nine Interveners before the Court including the Architects Regulation Board, the Solicitors Regulation Authority, the Bar Standards Board, the Local Government Association and HM Treasury.

Delivering the unanimous judgment of the Supreme Court on 29 April 2015, Lord Mance was emphatic in ruling that Article 13(2) of the Directive and Regulation 18(4) of the 2009 Regulations, did not preclude licensing authorities (or other regulatory bodies) from including the costs of regulatory and enforcement activities in determining the licence fees to be paid by licensed operators (or the practising fees to be paid by certified practitioners). Article 13 and Regulation 18 were solely concerned with ensuring that the costs charged for authorisation procedures (i.e. the clerical and administrative aspects of authorisation) were reasonable and proportionate to the actual costs of those procedures. Article 13 and Regulation 18 in no sense precluded licensing authorities from also including the costs of regulatory and enforcement activities in the total licence fees payable by licensed operators.

At paragraph 17 of the judgment Lord Mance said: "... article 13(2) (and so regulation 18) is concerned – and concerned only - with charges made in respect of authorisation procedures and their cost, and ... nothing in article 13(2) precludes a licensing authority from charging a fee for the possession or retention of a licence, and making this licence conditional upon payment of such fee. Any such fee would however have to comply with the requirements, including that of proportionality, identified in section 2 of Chapter III and section 1 of Chapter IV. But there is no reason why it should not be set at a level enabling the authority to recover from licensed operators the full cost of running and enforcing the licensing scheme, including the costs of enforcement and proceedings against those operating sex establishments without licences."

So common sense is restored, and much as they might prefer not to, Mr Hemming and his fellow sex shop operators must once again resign themselves to paying through their licence fees for the costs incurred by Westminster in undertaking regulatory and enforcement activity with regard to pornographers trading in the City. As for the community charge and business rate payers of Westminster (who Mr Hemming et al were contending should bear the burden of paying for such enforcement activity) - they will not be troubled by such additional expense. Likewise, with regard to other areas of licensable activity (where licensing authorities are empowered by domestic legislation to recover the costs of enforcement activity through licence fees) and regulated activity (e.g. practising as a barrister, solicitor or architect) - the decision of the Supreme Court has made clear that Directive 2006/123/EC on Services in the Internal Market and The Provision of Services Regulations 2009 do not preclude licensing authorities or other regulatory bodies from continuing to recoup their enforcement costs through fees charged to licensed operators or certified practitioners.

A most important decision by any standard. Game, set and match to Westminster? Well, almost, but not quite. Or at least, not quite yet. Whilst emphatically allowing Westminster's appeal to the extent described above, the Supreme Court remained uncertain on one discrete aspect of the case, which it has said should be referred to the European Court of Justice. That concerns Westminster's chosen method of exercising its right (as now established) to recover the costs of enforcement from licensed sex shop operators. Westminster charged all applicants for sex establishment licences a fee that included both a sum to cover the cost of administering the application and a sum representing a contribution towards Westminster's costs of enforcement. The latter sum was refunded to unsuccessful applicants, whilst the former sum was not.

The Supreme Court requires the European Court of Justice to determine whether that particular method of charging which effectively deprives unsuccessful applicants of the use of the latter sum whilst their application is being considered (as opposed to an alternative method of charging only successful applicants with a contribution towards the costs of enforcement) falls foul of the Directive. Needless to say, until the Court of Justice has determined that nice point, licensing authorities and other regulatory bodies would be well advised to play safe, and to require only successful applicants to make a contribution towards regulatory and enforcement costs.

David Matthias QC of Francis Taylor Building appeared as leading counsel for Westminster City Council before the Supreme Court on the Hemming appeal (but did not appear below) together with Nathalie Lieven QC and Jacqueline Lean.

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